Compensation Definition: A Guide to Pay

Key takeaways

Compensation plays a key role in a company’s ability to attract and retain employees when accepting a job offer and deciding to stay with a job.

• Employee compensation may be direct, in the form of pay and bonuses; indirect, in the form of paid time off or health insurance; or non-monetary, in the form of training, flexible schedules, and other benefits.

• Strong compensation can attract top talent and retain and motivate employees.

• You can work as a compensation and benefits manager as part of a human resources (HR) team to oversee employee compensation.

Learn about the definition of compensation, three types of employee compensation, how a fair compensation package helps companies, and more. If you’re ready to develop your HR skills, consider enrolling in the Human Resource Management: HR for People Managers Specialization from the University of Minnesota. You’ll have the opportunity to learn the best practices for hiring and rewarding employees in as little as two months. By the end, you’ll have gained in-depth HR knowledge that will prepare you for your career.

Compensation definition: What is it?

Compensation refers to monetary and non-monetary payments that organizations provide employees in exchange for work performed. Offering fair compensation plans, including a mix of monetary and non-monetary types of compensation, helps attract, motivate, and retain employees.

3 types of employee compensation

Companies have three options when choosing their employee compensation structures: direct, indirect, and non-monetary.

1. Direct compensation

When workers receive monetary compensation for completed work, it falls under the category of direct compensation. Employees can receive four different kinds of direct compensation: hourly pay, salary, commission, and bonuses:

• Hourly pay: A certain amount of income received for every hour worked

• Salary: A set amount of money paid to an employee over the course of a year, regardless of hours worked  

• Commission: An extra fixed amount of money paid to an employee based on a percentage of sales

• Bonuses: An extra variable amount of money paid to an employee for work above and beyond the job description

2. Indirect compensation

Indirect compensation refers to non-cash forms of compensation. Indirect compensation has a clear dollar cost to the employer. Examples of indirect compensation offered to employees include:

• Company cars

• Employer retirement contributions

• Health insurance

• Work-related equipment like laptops and smartphones

3. Non-monetary compensation

This type of compensation refers to rewards and advantages employees receive without monetary value; they are often cultural or structural. Examples of non-monetary compensation include:

• Public recognition, such as an employee of the month award

• Time off for community work or volunteering

• An open-door policy for manager access and constructive feedback

• Mentorship programs 

• Opportunities for training and attending other work-related events

Is compensation the same as salary?

While related, compensation and salary are not the same. Salary is the amount of money you earn on an annual basis to perform your job duties. Compensation includes your salary, along with additional benefits, such as bonuses, commissions, paid time off, health insurance benefits, and more.

Why is employee compensation important?

Strong compensation makes a company attractive to top candidates for jobs. It can also lead to high morale and work ethic for existing employees, and can keep employees from looking for other jobs. Efficient companies draw top talent and keep existing employees happy, preventing excess costs from interviewing, hiring, and training new employees during rates of high turnover.

Factors that impact compensation:

• Employee education

• Employee skills and experience

• Market trends for employee compensation

• Geographic location & cost of living

• Employee productivity

• Labor supply and demand

• Labor union requirements

• Company financial health & projections

Assessing compensation offerings is an important part of a company’s strategy for success. Many companies employee professionals who oversee compensation; they may work as compensation and benefits managers, or within a human resources department.

What is a compensation and benefits manager?

A compensation and benefits manager oversees any activities that involve employee compensation and benefits. This job might include setting and monitoring a company's pay and benefits structure, managing pay and benefits distribution, ensuring compliance with state and federal laws and regulations, and working with outside benefits and insurance professionals.

According to Glassdoor, the median total pay for a compensation and benefits manager totals $161,000 [1]. This figure includes base salary and additional pay, which may represent profit-sharing, commissions, bonuses, or other compensation.

10 skills that might help you become a compensation and benefits manager

1. Ability to think analytically

2. Attention to detail

3. Business acumen

4. Communication skills

5. Decision-making skills

6. Familiarity with compensation and benefits software

7. Knowledge of company policies and procedures

8. Organizational skills

9. Problem-solving skills

10. Time management

How to become a compensation and benefits manager

• Get a bachelor's degree. A degree in business administration, business management, human resources, and finance may make you a strong candidate.

• Get work experience. Entry-level positions that can help give you the experience for this job include assistant, coordinator, or specialist positions in benefits, compensation, payroll, job analysis, or human resources.

• Get certifications. Professional associations that offer certifications you might want include the International Foundation of Employee Benefit Plans and the Society for Human Resource Management.

Related jobs

Jobs with similar duties and skill requirements to those of a compensation and benefits manager include:

• Compensation, benefits, and job analyst

• Financial manager

• Human resource manager

• Human resource specialist

• Labor relations specialist

• Payroll administrator

• Payroll specialist

• Payroll processor

• Training and development manager

• Training and development specialist

Find helpful resources for your career

Read about industry trends and discover helpful career tips by subscribing to Career Chat, our LinkedIn newsletter. Then, explore these free resources for additional guidance:

• Broaden your knowledge: GenAI for HR: Use Cases and Benefits 

• Watch on YouTube: 7 Key Communication Skills to Thrive in Your Career 

• Take a quiz: Career Test: What Career Is Right for Me Quiz? 

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